U.S. STEM CELL, INC. (Exact name of registrant as specified in its charter)

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2016 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: (Exact name of registrant as specified in its charter) Florida (State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification No.) NW 4th Street, Suite 212, Sunrise, Florida (Address of principal executive offices) (Zip Code) (954) (Registrant s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No As of August 2, 2016, there were 14,450,459 outstanding shares of the Registrant s common stock, par value $0.001 per share. Transitional Small Business Disclosure Format Yes No

2 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed balance sheets as of June 30, 2016 (unaudited) and December 31, Condensed statements of operations for the three and six months ended June 30, 2016 and 2015 (unaudited) 5 Condensed statement of stockholders deficit for the six months ended June 30, 2016 (unaudited) 6 Condensed statements of cash flows for the six months ended June 30, 2016 and 2015 (unaudited) 7 Notes to condensed financial statements (unaudited) 8-24 ITEM 2. Management s Discussion and Analysis of Financial Condition and Results of Operations ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 33 ITEM 4. Controls and Procedures 34 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 35 ITEM 1A. Risk Factors 35 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 ITEM 3. Defaults Upon Senior Securities 35 ITEM 4. Mine Safety Disclosures 35 ITEM 5. Other Information 35 ITEM 6. Exhibits 36 SIGNATURES 41 EX Management Certification EX Sarbanes-Oxley Act

3 Item 1. PART I FINANCIAL INFORMATION Interim Condensed Financial Statements and Notes to Interim Financial Statements General The accompanying reviewed condensed interim financial unaudited statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders deficit in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company s annual report on Form 10-K for the year ended December 31, In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that can be expected for the year ending December 31, 2016.

4 CONDENSED BALANCE SHEETS June 30, December 31, (unaudited) ASSETS Current assets: Cash and cash equivalents $ 130,836 $ 58,372 Accounts receivable, net 41,624 35,032 Inventory 33,715 17,406 Prepaid and other - 4,832 Total current assets 206, ,642 Property and equipment, net 11,747 14,172 Other assets Investments 55,337 89,139 Deposits 10,160 10,160 Total assets $ 283,419 $ 229,113 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable, including $67,395 and $104,089 to related parties, respectively $ 1,334,593 $ 1,503,501 Accrued expenses 799, ,751 Advances, related party 104, ,505 Deferred revenue 89,318 71,961 Deposits 465, ,286 Promissory note, short term portion, net of debt discount of $74,922 and $78,864 respectively 75,078 71,136 Notes payable, related party 1,675,258 1,727,022 Notes payable, net of debt discount of $227,017 and $249,205, respectively 708, ,502 Derivative liabilities 481, ,927 Total current liabilities 5,734,425 5,704,591 Long term debt: Promissory note, long term portion, net of debt discount of $204,303 and $240,521, respectively 1,193,459 1,232,241 Notes payable, long term portion 983, ,727 Note payable, long term portion, related party - 30,000 Total long term debt 2,176,527 2,245,968 Total liabilities 7,910,952 7,950,559 Commitments and contingencies - - Stockholders' deficit: Preferred stock, par value $0.001; 20,000,000 shares authorized, 20,000,000 issued and outstanding 20,000 20,000 Common stock, par value $0.001; 2,000,000,000 shares authorized, 8,861,334 and 1,813,689 shares issued and 8,861,334 and 1,728,478 outstanding as of June 30, 2016 and December 31, 2015, respectively 8,861 1,814 Additional paid in capital 115,136, ,555,110 Treasury stock, 85,211 shares - (221,996) Accumulated deficit (122,792,604) (122,076,374) Total stockholders' deficit (7,627,533) (7,721,446) Total liabilities and stockholders' deficit $ 283,419 $ 229,113 See the accompanying notes to these condensed financial statements 4

5 CONDENSED STATEMENTS OF OPERATIONS (unaudited) Three months ended June 30, Six months ended June 30, Revenue: Products $ 364,910 $ 342,773 $ 866,335 $ 628,122 Services 313, , , ,742 Total revenue 678, ,307 1,389,168 1,054,864 Cost of sales 235, , , ,678 Gross profit 442, , , ,186 Cost and operating expenses: Research and development 3,971 6,751 7,466 8,006 Marketing, general and administrative 696, ,196 1,262,486 1,783,431 Depreciation and amortization 1,212 1,318 2,425 2,619 Total operating expenses 701, ,265 1,272,377 1,794,056 Net loss from operations (259,013) (480,224) (272,963) (1,287,870) Other income (expenses): Gain on settlement of debt 94,107 1,979,180 72,814 2,038,610 Gain on disposal of equipment Gain (loss) on change of fair value of derivative liability 128,889 (236,455) 143,395 (113,731) Income from equity investment 15,339 8,343 31,198 12,309 Other income 22,285-24,741 3,151 Interest expense (354,513) (384,250) (715,915) (814,092) Total other income (expenses) (93,893) 1,366,818 (443,267) 1,126,247 Net (loss) income before income taxes (352,906) 886,594 (716,230) (161,623) Income taxes (benefit) NET (LOSS) INCOME $ (352,906) $ 886,594 $ (716,230) $ (161,623) Net (loss) income per common share, basic $ (0.06) $ 1.20 $ (0.19) $ (0.24) Net (loss) income per common share, diluted $ (0.06) $ 0.95 $ (0.19) $ (0.24) Weighted average number of common shares outstanding, basic 5,436, ,091 3,745, ,184 Weighted average number of common shares outstanding, diluted 5,436, ,144 3,745, ,184 See the accompanying notes to these unaudited condensed financial statements 5

6 CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT SIX MONTHS ENDED JUNE 30, 2016 (unaudited) Additional Preferred stock Common stock Paid in Treasury Accumulated Shares Amount Shares Amount Capital Stock Deficit Total Balance, January 1, ,000,000 $ 20,000 1,813,689 $ 1,814 $ 114,555,110 $ (221,996) $ (122,076,374) $ (7,721,446) Common stock issued in settlement of accounts payable and accrued interest , , ,219 Common stock issued in connection with settlement of other debt - - 6,360,520 6, , ,812 Common stock issued in settlement of note payable, related party , , ,572 Purchase of 10,250 shares of Company's common stock at average cost of $0.76 per share (7,817) - (7,817) Treasury shares canceled and returned to authorized - - (95,461) (95) (229,718) 229, Change in fair value of repriced employee stock options Stock based compensation , ,423 Net loss (716,230) (716,230) Balance, June 30, ,000,000 $ 20,000 8,861,334 $ 8,861 $ 115,136,210 $ - $ (122,792,604) $ (7,627,533) See the accompanying notes to these unaudited condensed financial statements 6

7 CONDENSED STATEMENTS OF CASH FLOWS (unaudited) Six months ended June 30, CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (716,230) $ (161,623) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,425 2,619 Bad debt expense 16,358 - Discount on convertible debt 398, ,629 Change in fair value of derivative liability (143,395) 113,731 Gain on settlement of debt (72,814) (2,038,610) Gain on sale of equipment (500) - Common stock issued in settlement of litigation - 59,850 Non-cash payment of interest 150, ,303 Income on equity investments (31,198) (12,309) Stock based compensation 141, ,301 Change in fair value of repriced employee options (Increase) decrease in: Receivables (22,950) (3,095) Inventory (16,309) - Prepaid and other current assets 4,832 7,472 Increase (decrease) in: Accounts payable 13, ,956 Accrued expenses 91, ,950 Deferred revenue 17,357 37,100 Net cash used in operating activities (165,596) (646,726) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from (payments to) equity investments 65,000 (10,000) Proceeds from sale of property and equipment Purchase of treasury stock (7,817) (50,272) Acquisitions of property and equipment - (894) Net cash provided by (used in) investing activities 57,683 (61,166) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net - 533,945 Proceeds from notes payable 457, ,000 Net proceeds from related party advances 15,000 6,604 Repayments of related party notes (81,764) - Repayments of notes payable (210,755) (90,797) Net cash provided in financing activities 180, ,752 Net increase in cash and cash equivalents 72,464 56,860 Cash and cash equivalents, beginning of period 58,372 36,674 Cash and cash equivalents, end of period $ 130,836 $ 93,534 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 31,683 $ 191,773 Income taxes paid $ - $ - Non-cash financing activities: Common stock issued in settlement of notes payable $ 245,310 $ 388,259 Common stock issued in settlement of accounts payable $ 93,219 $ 112,767 Common stock issued in settlement of note payable, related party $ 10,000 $ - Common stock issued in settlement of guarantor fees $ - $ 170,101 Promissory note issued in exchange for subordinated debt and accrued expenses $ - $ 1,697,792 See the accompanying notes to these unaudited condensed financial statements 7

8 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) A summary of the significant accounting policies applied in the presentation of the accompanying unaudited condensed financial statements follows: General The accompanying unaudited condensed financial statements of U.S. Stem Cell, Inc., (the Company ), have been prepared in accordance with the rules and regulations (Regulation S-X) of the Securities and Exchange Commission (the SEC ) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results from operations for the three and six month period ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, The unaudited condensed financial statements should be read in conjunction with the December 31, 2015 financial statements and notes thereto included in the Company s Annual Report on Form 10-K. Basis and business presentation U.S. Stem Cell, Inc. was incorporated under the laws of the State of Florida in August, The Company is in the cardiovascular sector of the cell technology industry delivering cell therapies and biologics that help address congestive heart failure, lower limb ischemia, chronic heart ischemia, acute myocardial infarctions and other issues. The business includes the development of proprietary cell therapy products as well as revenue generating physician and patient based regenerative medicine/cell therapy training services, cell collection and cell storage services, the sale of cell collection and treatment kits for humans and animals, and the operation of a cell therapy clinic. To date, the Company has not generated significant sales revenues in that they remain less than their total operating expenses, has incurred expenses, and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a research and development business enterprise. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification subtopic , Revenue Recognition ( ASC ) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. At the time of each transaction, management assesses whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. The assessment of whether the fee is fixed or determinable is based upon the payment terms of the transaction. Collectability is assessed based on a number of factors, including past transaction history with the client and the creditworthiness of the client. The Company s primary source of revenue are from the sale of test kits and equipment, training services, patient treatments and laboratory services, and cell banking. Revenues for kits and equipment sold are not recorded until kits and equipment are shipped. Revenues from trainings are recognized when the training occurs. Any cash received as a deposit for trainings are recorded by the company as a liability. 8

9 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) Patient treatments and laboratory services revenue are recognized when those services have been completed or satisfied. Revenues for cell banking sales are accounted for as Multiple-Element Arrangements under ASC which incorporates Accounting Standards Codification subtopic , Multiple-Element Arrangements ( ASC ). ASC addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Because the Company sells its services separately, on more than a limited basis and at a price within a narrow range, the Company was able to allocate revenue based on vendor-specific objective evidence of fair value (VSOE). At June 30, 2016 and December 31, 2015, the Company had deferred revenues of $89,318 and $71,961, respectively. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the Company s stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates. Accounts Receivable Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Allowance for Doubtful Accounts Any charges to the allowance for doubtful accounts on accounts receivable are charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of June 30, 2016 and December 31, 2015, allowance for doubtful accounts was $15,759 and $-0-, respectively. Inventories Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs. Investments The Company has adopted Accounting Standards Codification subtopic , Investments-Equity Methods and Joint Ventures ( ASC ) which requires the accounting for investments where the Company can exert significant influence, but not control of a joint venture or equity investment. The Company accounted for its 33 percent ownership of U.S. Stem Cell Clinic, LLC utilizing the equity method of accounting. (See Note 3) 9

10 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) Stock based compensation The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such amounts were paid in cash. As of June 30, 2016, there were outstanding stock options to purchase 705,805 shares of common stock, 512,857 shares of which were vested. Net Loss per Share The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period, adjusted to give effect to the 1,000-for-1 reverse stock split, which was effective in the market on November 5, 2015 (Note 9). Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the treasury stock and/or if converted methods as applicable. The computation of basic and diluted loss per share for the three months ended June 301, 2016 and for the six months ended June 30, 2016 and 2015 excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period. Potentially dilutive securities excluded from the computation of basic and diluted net income (loss) per share are as follows: Treasury Stock June 30, 2016 June 30, 2015 Convertible debt 47,867, ,053 Series A convertible preferred stock 20,000,000 20,000,000 Options to purchase common stock 705,805 73,900 Warrants to purchase common stock 139, ,684 Totals 68,712,529 20,410,637 The Company uses the cost method when it purchases its own common stock as treasury shares and displays treasury stock as a reduction of shareholders equity. Concentrations of Credit Risk The Company s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Generally, the Company s cash and cash equivalents in interest-bearing accounts does not exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management. As of June 30, 2016, four customers represented 25%, 16%, 13% and 11%, respectively, representing an aggregate of 65% of the Company s accounts receivable. As of December 31, 2015, three customers represented 32%, 18% and 16% respectively, representing, an aggregate of 66%, of the Company s accounts receivable. For the three months ended June 30, 2016, the Company s revenues earned from the sale of products and services were $678,222, of which one customer represented 6% of the Company s revenues. For the three months ended June 30, 2015, the Company s revenues earned from the sale of products and services were $565,307, of which two customers represented 5% and 6% of the Company s revenues. 10

11 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) For the six months ended June 30, 2016, the Company s revenues earned from the sale of products and services were $1,427,146, of which one customer represented 11% of the Company s revenues. For the six months ended June 30, 2015, the Company s revenues earned from the sale of products and services were $1,054,864, of which two customers represented 6% and 7% of the Company s revenues. Research and Development The Company accounts for research and development costs in accordance with Accounting Standards Codification subtopic , Research and Development ( ASC ). Under ASC , all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved as defined under the applicable agreement. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred research and development expenses of $3,971 and $7,466 for the three and six months ended June 30, 2016, respectively; and $6,751 and $8,006 for the three and six months ended June 30, 2015, respectively. Fair Value Accounting Standards Codification subtopic , Financial Instruments ( ASC ) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed. The Company follows Accounting Standards Codification subtopic , Fair Value Measurements and Disclosures ( ASC ) and Accounting Standards Codification subtopic , Financial Instruments ( ASC ), which permits entities to choose to measure many financial instruments and certain other items at fair value. Derivative Instrument Liability The Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges. At June 30, 2016 and December 31, 2015, the Company had outstanding convertible notes and warrants that contained embedded derivatives. These embedded derivatives include certain conversion features and reset provisions. (See Note 6 and Note 8). Income Taxes The Company follows Accounting Standards Codification subtopic , Income Taxes ( ASC ) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. 11

12 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse and are considered immaterial. Recent Accounting Pronouncements There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows. Reclassification Certain reclassifications have been made to prior periods data to conform with the current year s presentation. These reclassifications had no effect on reported income or losses. Subsequent Events The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, except as disclosed. NOTE 2 GOING CONCERN AND MANAGEMENT S LIQUIDITY PLANS The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements during six months ended June 30, 2016, the Company incurred net losses of $716,230 and used $165,596 in cash for operating activities. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's primary source of operating funds in 2015 and 2016 has been from revenue generated from sales with additional cash proceeds from the sale of common stock and the issuance of convertible and other debt. The Company has experienced net losses and negative cash flows from operations since inception, but expects these conditions to improve in 2016 and beyond as it develops it business model. The Company has stockholders' deficiencies at June 30, 2016 and requires additional financing to fund future operations. The Company s existence is dependent upon management s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company s financing efforts will result in profitable operations or the resolution of the Company s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern. NOTE 3 INVESTMENTS The investment recorded is comprised of a 33% ownership of U.S. Stem Cell Clinic, LLC, accounted for using the equity method of accounting. The investments in 2014 and 2015 of cash and expenses paid on U.S. Stem Cell Clinic, LLC s behalf were in aggregate of $59,714. The Company s 33% income earned by U.S. Stem Cell Clinic, LLC of $15,339 and $31,198 for the three and six months ended June 30, 2016; and $8,343 and $12,309 for the three and six months ended June 30, 2015, respectively, (inception to date income of $60,623) was recorded as other income/expense in the Company s Statement of Operations in the appropriate periods. In addition, during the six months ended June 30, 2016, the Company received a distribution of $65,000 from U.S. Stem Cell Clinic, LLC. The carrying value of the investment at June 30, 2016 was $55,337. At June 30, 2016 and December 31, 2015, accounts receivable for sales of test kits to U.S. Stem Cell Clinic, LLC was $10,893 and $5,946; revenues earned from sales to U.S. Stem Clinic, LLC for the three and six months ended June 30, 2016 were $77,333 and $160,851; and for the three and six months ended June 30, 2015 were $36,079 and $60,495, respectively. 12

13 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) NOTE 4 PROPERTY AND EQUIPMENT Property and equipment as of June 30, 2016 and December 31, 2015 is summarized as follows: June 30, 2016 December 31, 2015 Laboratory and medical equipment $ 329,638 $ 353,253 Furniture, fixtures and equipment 130, ,410 Computer equipment 48,788 48,788 Leasehold improvements 362, , , ,497 Less accumulated depreciation and amortization (859,135) (880,325) $ 11,747 $ 14,172 Property and equipment are recorded on the basis of cost. For financial statement purposes, property, plant and equipment are depreciated using the straight-line method over their estimated useful lives. During the six months ended June 30, 2016, the Company sold fully depreciated equipment for net proceeds (and gain) of $500. Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the carrying value of its property and equipment for impairment in accordance with the guidance for impairment of long lived assets. NOTE 5 ACCRUED EXPENSES Accrued expenses consisted of the following as of June 30, 2016 and December 31, 2015: June 30, 2016 December 31, 2015 Amounts payable to the Guarantors of the Company s loan agreement with Bank of America and Seaside Bank, including fees and interest $ 108,776 $ 64,199 Interest payable on notes payable 538, ,664 Vendor accruals and other 146, ,244 Employee commissions, compensation, etc. 4,861 47,644 $ 799,063 $ 726,751 During the six months ended June 30, 2016, the Company issued an aggregate of 767,980 shares of its common stock in settlement of outstanding accounts payable and accrued expenses. In connection with the issuance, the Company incurred $112,242 net gain in settlement of debt. 13

14 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) NOTE 6 NOTES PAYABLE Promissory notes payable were comprised of the following as of June 30, 2016 and December 31, 2015: Seaside Bank June 30, 2016 December 31, 2015 Seaside Bank note payable. $ 980,000 $ 980,000 Hunton & Williams notes payable 384, ,972 Daniel James Management notes payable 81,425 75,000 Fourth Man, LLC notes payable 75,000 77,450 Magna Group notes payable 263, ,000 Power Up Lending Group notes payable 187, ,235 Equipment finance lease 4,179 4,777 Total notes payable 1,976,734 1,841,434 Less unamortized debt discount (284,702) (249,205) Total notes payable net of unamortized debt discount 1,692,032 1,592,229 Less current portion (708,964) (608,502) Long term portion $ 983,068 $ 983,727 On October 25, 2010, the Company entered into a Loan Agreement with Seaside National Bank and Trust for a $980,000 loan at 4.25% per annum interest that was used to refinance the Company s loan with Bank of America. The obligation is guaranteed by certain shareholders of the Company. The Company renewed the loan with Seaside National Bank and Trust during the first quarter of 2016 to extend the maturity date to January 11, Hunton & Williams Notes At June 30, 2016 and December 31, 2015, the Company has two outstanding notes payable with interest at 8% per annum due at maturity. The two notes, $61,150 and $323,822, are payable in one balloon payment upon the date the Noteholder provides written demand, however the Company is not obligated to make payments until the Northstar (or successor) Loan is paid off. Daniel James Management (during this period) 2016 Notes During the six months ended June 30, 2016, the Company entered into Securities Purchase Agreements with Daniel James Management ( Daniel ) for the sale of 9.5% convertible promissory note in aggregate principal amount of $75,000 (the Daniel Notes ). The Daniel Notes bear interest at the rate of 9.5% per annum. As of the six months ended June 30, 2016, all interest and principal must be repaid one year from the issuance date, with the last note being due March 9, The Daniel Notes are convertible into common stock, at holder s option, at a 47% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. The Company has identified the embedded derivatives related to the Daniel Notes. These embedded derivatives included certain conversion features and reset provision. (see Note 8). The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Daniel Notes and to fair value as of each subsequent reporting date which at June 30, 2016 was $99,823. At the inception of the Daniel Notes, the Company determined the aggregate fair value of $139,691 of the embedded derivatives. During the six months ended June 30, 2016, $68,575 of promissory notes plus accrued interest that were outstanding at December 31, 2015 were converted into shares of the Company s common stock (see Note 9). 14

15 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) The remaining aggregate promissory notes to Daniel unconverted principle balance as of June 30, 2016 was $81,425. Fourth Man (during this period) During the six months ended June 30, 2016, the Company entered into Securities Purchase Agreements with Fourth Man, LLC ( Fourth Man ) for the sale of 9.5% convertible promissory note in aggregate principal amount of $50,000 (the Daniel Notes ). The Fourth Man Notes bear interest at the rate of 9.5% per annum. As of the six months ended June 30, 2016, all interest and principal must be repaid one year from the issuance date, with the last note being due June 26, The Fourth Man Notes are convertible into common stock, at holder s option, at a 49% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. The Company has identified the embedded derivatives related to the Fourth Man Notes. These embedded derivatives included certain conversion features and reset provision. (see Note 8). The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Daniel Notes and to fair value as of each subsequent reporting date which at June 30, 2016 was $76,052. At the inception of the Fourth Man Notes, the Company determined the aggregate fair value of $122,435 of the embedded derivatives. During the six months ended June 30, 2016, $52,450 of promissory notes plus accrued interest that were outstanding at December 31, 2015 were converted into shares of the Company s common stock (see Note 9). The remaining aggregate promissory notes to Fourth Man unconverted principle balance as of June 30, 2016 was $75,000. Magna Group (during this period) 2015 Note On December 3, 2015, the Company entered into a Securities Purchase Agreement with Magna Equities II, LLC ( Magna ) for the sale of a 12% convertible promissory note in the principal amount of $262,500 (the Note ). The Note was subsequently funded in February 2016 upon effectiveness of the Company s registration statement (see below). Proceeds from the note was $250,000 (less an original issue discount of 5% or $12,500). The Note bears interest at the rate of 12% per annum. All interest and principal must be repaid on December 3, The Note is convertible into common stock, at Magna s option, at the lower of i) 40% discount to the lowest sales price of the common stock during the 5 trading day period prior to conversion or ii) $0.70. In the event the Company prepays the Note in full, the Company is required to pay off all principal at 140%, interest and any other amounts. On December 12, 2014, the Company filed a Registration Statement on Form S-1 to register 341,718 shares of common issuable upon the conversion of Magna Equity II, LLC convertible notes dated December 3, 2015 (as restated) for $110,000 and December 3, 2015 for $262,500. The latter note was funded in February The Registration Statement on Form S-1 was declared effective on February 12, 2016 The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Notes to Magna and to fair value as of each subsequent reporting date which at June 30, 2016 was $229,518. At the inception of the Notes, the Company determined the aggregate fair value of $263,204 of the embedded derivatives. During the six months ended June 30, 2016, $124,285 of the 2015 notes were converted into shares of the Company s common stock (see Note 9). The remaining aggregate Magna Group promissory notes unconverted principle balance as of June 30, 2016 was $263,

16 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) PowerUp Lending Group, Ltd (during this period) On March 23, 2016, the Company entered into a revenue based factoring agreement and received an aggregate of $200,000 (less origination fees of $1,650) in exchange for $276,000 of future receipts relating to monies collected from customers or other third party payors. Under the terms of the agreements, the Company is required to make daily payments equal to $1,314 for 210 business days. The Company received net proceeds of $82,896 along with cancellation of the previous revenue based factoring agreement issued in In connection with the cancellation of the December 2015 revenue based factoring agreements, the Company incurred a loss in settlement of debt of $39,449. The remaining principle balance of the PowerUp Lending Group promissory notes payable at June 30, 2016 is $187,943. At June 30, 2016, the Company has recorded interest expense in the amount of $31,421 under the terms of the agreements. The remaining unamortized debt discount at June 30, 2016 is $57,685. Promissory note On June 1, 2015, the Company issued an amended and restated promissory note of $1,697,762 in settlement of the $1,500,000 outstanding subordinated debt, related accrued interest of $373,469 and accumulated and unpaid guarantor fees of $624,737. The note is unsecured and non-interest bearing with four semi-annual payments of $75,000 beginning on December 31, 2015 with the remaining unpaid balance due June 1, The Company imputed an interest rate of 5% and discounted the promissory note accordingly. The imputed debt discount of $368,615 is amortized to interest expense using the effective interest method. For the three and six months ended June 30, 2016, the Company amortized $19,931 and $40,160 of debt discounts to current period operations as interest expense, respectively. The unamortized debt discount at June 30, 2016 is $279,225. During 2016 the Company made principle payments of $75,000 on the promissory note. Summary: The Company has identified the embedded derivatives related to the Daniel, Fourth Man and Magna promissory notes. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of these notes and to fair value as of each subsequent reporting date which at June 30, 2016 was $405,393. The fair value of the embedded derivatives at issuance of the Daniel, Fourth Man and Magna promissory notes, were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of % to %, (3) weighted average risk-free interest rate of 0.45% to 0.69%, (4) expected lives of 0.79 to 1.00 years, and (5) estimated fair value of the Company s common stock from $0.016 to $ per share. The initial fair value of the embedded debt derivative of $525,330 was allocated as a debt discount up to the proceeds of the notes ($375,000) with the remainder ($150,330) charged to current period operations as interest expense. For the three and six months ended June 30, 2016, the Company amortized an aggregate of $171,576 and $358,523 of debt discounts to current period operations as interest expense, respectively. NOTE 7 RELATED PARTY TRANSACTIONS Advances As of June 30, 2016 and December 31, 2015, the Company s officers and directors have provided advances in the aggregate of $104,901 and $106,505 respectively, for working capital purposes. The advances are unsecured, due on demand and non-interest bearing. On February 12, 2016, the Company issued 14,606 shares of its common stock in settlement of $10,000 of the outstanding advances due. In connection with the settlement, the Company realized a net gain on settlement of debt of $3,

17 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) Notes payable-related party Northstar Biotechnology Group, LLC On February 29, 2012, a promissory note issued to BlueCrest Master Fund Limited was assigned to Northstar Biotechnology Group, LLC ( Northstar ), owned partly by certain directors and existing shareholders of the Company, including Dr. William P. Murphy Jr., Dr. Samuel Ahn and Charles Hart. At the date of the assignment, the principal amount of the BlueCrest note was $544,267 the ( Note ). On March 30, 2012, the Company and Northstar agreed to extend until May 1, 2012 the initial payment date for any and all required monthly under the Note, such that the first of the four monthly payments required under the Note will be due and payable on May, 2012 and all subsequent payments will be due on a monthly basis thereafter commencing on June 1, 2012, and to waive any and all defaults and/or events of default under the Note with respect to such payments. The Company did not make the required payment, and as a result, was in default of the revised agreement The Company renegotiated the terms of the Note and Northstar agreed to suspend the requirement of principal payments by the Company and allow payment of interest-only in common stock. On September 21, 2012, the Company issued 5,000 common stock purchase warrants to Northstar that was treated as additional interest expense upon issuance. On October 1, 2012, the Company and Northstar entered into a limited waiver and forbearance agreement providing a recapitalized new note balance comprised of all sums due Northstar with a maturity date extended perpetually. The Company agreed to issue 5,000,000 shares of Series A Convertible Preferred Stock and 10,000 of common stock in exchange for $210,000 as payment towards outstanding debt, default interest, penalties, professional fees outstanding and due Northstar. In addition, the Company executed a security agreement granting Northstar a lien on all patents, patent applications, trademarks, service marks, copyrights and intellectual property rights of any nature, as well as the results of all clinical trials, know-how for preparing Myoblasts, old and new clinical data, existing approved trials, all right and title to Myoblasts, clinical trial protocols and other property rights. In addition, the Company granted Northstar a perpetual license on products as described for resale, relicensing and commercialization outside the United States. In connection with the granted license, Northstar shall pay the Company a royalty of up to 8% on revenues generated. Effective October 1, 2012, the effective interest rate was 12.85% per annum. The parties agreed, as of February 28, 2013, to reduce the interest rate to 7% per annum. In connection with the consideration paid, Northstar waived, from the effective date through the earlier of termination or expiration of the agreement, satisfaction of the obligations as described in the forbearance agreement. In 2012, 5,000,000 shares of Series A Convertible Preferred Stock were approved to be issued, which was subsequently increased to 20,000,000 shares of preferred stock as Series A Convertible Preferred Stock. In addition, the Company is obligated to issue additional preferred stock equal in lieu of payment of cash of accrued and unpaid interest on each six month anniversary of the effective date (October 1, 2012). In lieu of the initial two payments in preferred stock, the parties have determined to modify the voting rights of the Series A Convertible Preferred Stock from 20 votes per share on matters to be voted on by the common stock holders to 25 votes per share on matters to be voted on by the common stock holders and all prior and subsequent payments of interest will be in common stock. The Company is required to issue additional shares of its common stock (as amended), in lieu of cash, each six month anniversary of the effective date for any accrued and unpaid interest. As described above, during the year ended December 31, 2013, the Company issued the 5,000,000 shares of Series A Convertible Preferred Stock and the 10,000 of common stock described above in exchange for the $210,000 as payment towards outstanding principle of the debt. In addition, the Company issued 15,000,000 shares of Series A Convertible Preferred Stock as a penalty in settlement of the terms of the forbearance agreement. The fair value of the Preferred Stock of $274,050 was included in interest expense for the year ended December 31,

18 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) On September 30, 2013, the Company issued 8,772 shares of its common stock as payment of $100,000 towards cash advances. On December 24, 2013, the Company issued 3,916 shares of its common stock as payment of accrued interest through June 30, 2013 of $85,447. On April 2, 2014, the Company issued 275 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,635 due April 1, 2014 per the forbearance agreement. On September 17, 2014, limited waiver and forbearance agreement entered into on October 1, 2012 to provide that the perpetual license on products as described for resale, relicensing and commercialization outside the United States was amended as such to condition upon NorthStar providing certain financing, which financing the Company, in its sole discretion, could decline and retain the license. On October 3, 2014, the Company issued 515 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2014 per the forbearance agreement. On April 3, 2015, the Company issued 1,363 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,635 due April 1, 2015 per the forbearance agreement. On October 2, 2015, the Company issued 4,156 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due October 1, 2015 per the forbearance agreement. On October 7, 2015, the Company issued 34,522 shares of its common stock in settlement of $100,000 principal payment towards the outstanding debt. On April 7, 2016, the Company issued 57,778 shares of its common stock in lieu of payment in cash of accrued and unpaid interest of $12,705 due April 1, 2016 per the forbearance agreement. As of June 30, 2016 and December 31, 2015, the principal of this note was $262,000. Officer and Director Notes Note payable, Ms. Murphy June 30, 2016 December 31, 2015 Note payable, Beverly Murphy 50,000 50,000 Note payable, Mr. Tomas 200, ,250 Note payable, Mr. Tomas 375, ,000 Note payable, Mr. Tomas 500, ,000 Note payable, Ms. Comella 287, ,772 Total $ 1,413,258 $ 1,465,022 At June 30, 2016 and December 31, 2015, the Company has outstanding promissory note payable of $50,000 due to Beverly Murphy with interest at 7% per annum due at maturity at October 15, Notes payable, Mr. Tomas In 2013, the Company issued a promissory note payable for previous advances and accrued compensation. The promissory note bears interest of 5% per annum and due on demand. During the six months ended June 30, 2016, the Company paid off $51,764 of the outstanding promissory note. The principal outstanding balance of this note as of June 30, 2016 is $200,

19 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) On August 1, 2013, the Company issued a $375,000 promissory note due on demand in settlement of accrued compensation. The promissory note bears interest of 5% per annum and is due on demand. The principal outstanding balance of this note as of June 30, 2016 is $375,000. On July 1, 2014, the Company issued a $500,000 promissory note in settlement of accrued compensation. The promissory note bears interest of 5% per annum and was due on January 1, The principal outstanding balance of this note as of June 30, 2016 is $500,000. Notes payable, Ms. Comella On July 1, 2014, the Company issued a $300,000 promissory note in settlement of accrued compensation. The promissory note bears interest of 5% per annum and due on January 1, During the years ended December 31, 2015 and 2014, the Company paid off an aggregate of $12,228 of the outstanding promissory note. The principal outstanding balance of this promissory note as of June 30, 2016 is $287,772. Transactions with Pavillion During the three and six months ended June 30, 2016, the Company purchased $-0- of lab kits from Pavillion, Inc. and a related party whose owner is related to an officer of the Company. During the three and six months ended June 30, 2015, the Company purchased $80,504 and $172,298 lab kits, respectively. As of June 30, 2016 and December 31, 2015, the Company had $64,395 and $74,793, respectively, in accounts payable owed to Pavillion. On May 1, 2016, the Company entered into a consulting agreement with Pavillion. The agreement is for 12 months and renewable for 6 month periods. Compensation is at $250 per hour or, at the Company s discretion, in shares of the Company s common stock. For the three and six months ended June 30, 2016, the Company has incurred $20,000 under the agreement. NOTE 8 DERIVATIVE LIABILITIES Reset warrants On October 1, 2012, in connection with the forbearance agreement with Northstar as discussed in Note 7 above, the Company issued an aggregate of 15,000 common stock purchase warrants to purchase the Company s common stock with an exercise price of $14.00 per share for ten years with anti-dilutive (reset) provisions. The Company has identified embedded derivatives related to the issued warrants. These embedded derivatives included certain and anti-dilutive (reset) provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date. At June 30, 2016, the fair value of the reset provision related to the embedded derivative liability of $192 was determined using the Binomial Option Pricing model with the following assumptions: dividend yield: 0%; volatility: %; risk free rate: 1.29%; and expected life: 6.25 years. The Company recorded a gain on change in derivative liabilities of $1,393 and $12,017 during the three and six months ended June 30, Convertible notes In 2015 and the six months ended June 30, 2016, the Company issued convertible promissory notes (see Note 6 above). These promissory notes are convertible into common stock, at holders option, at a discount to the market price of the Company s common stock. The Company has identified the embedded derivatives related to these promissory notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of these notes and to fair value as of each subsequent reporting date. 19

20 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) The fair value of the embedded derivatives at June 30, 2016, in the amount of $481,772, was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of %, (3) weighted average risk-free interest rate of 0.20% to 0.45%, (4) expected lives of 0.09 to 0.99 years, and (5) estimated fair value of the Company s common stock of $ per share. The Company recorded a gain on change in derivative liabilities of $127,496 and $131,378 during the three and six months ended June 30, Based upon ASC (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC to its outstanding convertible promissory notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date. NOTE 9 STOCKHOLDERS EQUITY Common stock During the six months ended June 30, 2016, the Company issued an aggregate of 6,360,520 shares of its common stock for the conversion of $251,915 of promissory notes payable and related accrued interest. Upon conversion of the notes, the Company recorded an adjustment to the derivative liability in the amount of $323,898 (see Note 12). During the six months ended June 30, 2016, the Company purchased 10,250 shares of the Company s common stock in the open market at an average cost of $0.76 per share. During the six months ended June 30, 2016, the Company returned and canceled 92,811 shares of the Company s common stock previously purchased (treasury shares) at an average cost of $2.46 per share. NOTE 10 STOCK OPTIONS AND WARRANTS Stock Options In December 1999, the Board of Directors and shareholders adopted the 1999 Officers and Employees Stock Option Plan, or the Employee Plan, and the 1999 Directors and Consultants Stock Option Plan, or the Director Plan. The Employee Plan and the Director Plan are collectively referred to herein as the Plans. The Plans are administered by the Board of Directors and the Compensation Committee. The objectives of the Plans include attracting and retaining key personnel by encouraging stock ownership in the Company by such persons. In February 2010, the Directors & Consultants Plan was amended to extend the termination date of the Plan to December 1, On April 1, 2013, the Board of Directors approved, subject to shareholder approval, the establishment of the Bioheart 2013 Omnibus Equity Compensation Plan, or the 2013 Omnibus Plan. The 2013 Omnibus Plan reserves up to fifty thousand shares of common stock for issuance. On August 4, 2014, the Board of Directors approved to set the reserve to one hundred thousand shares of common stock for issuance and to close the 1999 Officers and Employees Stock Option Plan. On February 2, 2015, at the annual meeting of shareholders, the majority of shareholders approved the 2013 Omnibus Equity Compensation Plan. On November 2, 2015, the Board of Directors approved the increase of the reserve under the 2013 Omnibus Plan to five hundred million shares of common stock for issuance. 20

21 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) A summary of options at June 30, 2016 and activity during the six months then ended is presented below: Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Options outstanding at January 1, ,933 $ Granted 489,116 $ Exercised Forfeited/Expired (229) $ 5, Options outstanding at December 31, ,820 $ Granted 150,000 $ Exercised Forfeited/Expired (15) $ 2, Options outstanding at June 30, ,805 $ Options exercisable at June 30, ,857 $ Available for grant at June 30, ,233,070 The following information applies to options outstanding and exercisable at June 30, 2016: Shares Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Remaining Average Average Contractual Exercise Exercise Term Price Shares Price $ 0.00 $ , $ ,635 $ 0.16 $ $ $ $ $ > $ 2, $ 2, , $ ,857 $ 0.70 On April 18, 2016, the Company granted an aggregate 150,000 options to purchase the Company s common stock at $ per share to key employees, vesting over 4 years, at grant date anniversary and exercisable over 10 years. The aggregate fair value of $10,928, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: % and Risk free rate: 1.54%. On April 18, 2016, the Company repriced an aggregate of 555,433 previously issued options with exercise prices from $1.71 to $7, per share to $ per share. All other terms and conditions were unchanged. The aggregate change in fair value of $934, determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: % and Risk free rate: 0.22% to 1.78%, was charged to current period operations. The fair value of all options vesting during the three and six months ended June 30, 2016 of $70,714 and $141,806, respectively, was charged to current period operations. The fair value of all options vesting during the three and six months ended June 30, 2015 of $75,275 and $272,241, respectively, was charged to current period operations. As of June 30, 2016, the Company had approximately $359,346 of total unrecognized compensation cost related to non-vested awards granted under the Plan, which the Company expects to recognize over a weighted average period of 0.88 years. 21

22 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) Warrants A summary of common stock purchase warrants at June 30, 2016 and activity during the six months ended June 30, 2016 is presented below: Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Shares Outstanding at January 1, ,620 $ Issued 2,072 $ Exercised - Expired (13,325) $ Outstanding at December 31, ,367 $ Issued - Exercised - Expired (33) $ 7, Outstanding at June 30, ,334 $ Exercisable at June 30, ,789 $ The following information applies to common stock purchase warrants outstanding and exercisable at June 30, 2016: Warrants Outstanding Warrants Exercisable Weighted- Shares Average Remaining Contractual Term Weighted- Average Exercise Price Shares Weighted- Average Exercise Price $ 0.01 $ , $ ,108 $ $ $ , $ ,743 $ $ $ $ $ $ $ , $ ,253 $ $ $ $ $ $ > , $ 2, ,514 $ 1, , $ ,789 $ NOTE 11 COMMITMENTS AND CONTINGENCIES Leases On February 4, 2016, the Company amended its facility lease to extend the term of the lease until August 31, Approximate annual future minimum lease obligations under non-cancelable operating lease agreements as of June 30, 2016 are as follows: Period ending December 31, 2016 (six months) $ 43, , , ,448 Total $ 277,633 22

23 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) Litigation On September 17, 2015, a product liability lawsuit was filed in Broward County, specifically Patsy Bade v. Bioheart, Inc. US Stem Cell Clinics LLC, Aleiandro Perez, ARNP, and Shareen Greenbaum, M.D., and on November 30, 2015, a product liability lawsuit was filed in Broward County, specifically Elizabeth Noble v. Bioheart, Inc. US Stem Cell Clinics LLC, Aleiandro Perez, ARNP, and Shareen Greenbaum, M.D. During the six months ended June 30, 2016, both matters settled by the Company s insurance policy with no additional cost to the Company. On February 8, 2016, a collection lawsuit was filed in Broward County, specifically Roche Diagnostics Corp. v. U.S Stem Cell, Inc. demanding judgement against the Company for an aggregate of $42,246 plus interest and costs for alleged unpaid product. The Company s position is the lawsuit is without merit and intends to dispute the claim vigorously. The Company is subject at times to other legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. There was no outstanding litigation as of June 30, 2016 other then described above. NOTE 12 FAIR VALUE MEASUREMENT The Company adopted the provisions of Accounting Standards Codification subtopic , Financial Instruments ( ASC ) on January 1, ASC defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC establishes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. All items required to be recorded or measured on a recurring basis are based upon level 3 inputs. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement. Upon adoption of ASC , there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements. The carrying value of the Company s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity. 23

24 NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2016 (unaudited) As of June 30, 2016 or December 31, 2015, the Company did not have any items that would be classified as level 1 or 2 disclosures. The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in notes 6 and 8. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Notes 6 and 8 are that of volatility and market price of the underlying common stock of the Company. As of June 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges. The derivative liability as of June 30, 2016, in the amount of $481,964 has a level 3 classification. The following table provides a summary of changes in fair value of the Company s Level 3 financial liabilities as of June 30, 2016: Warrant Liability Debt Derivative Balance, December 31, ,920 $ 591,351 Total (gains) losses Initial fair value of debt derivative at note issuance 1,097,379 Mark-to-market at December 31, 2015: (137,711) 122,616 Transfers out of Level 3 upon conversion and settlement of notes (1,399,628) Balance, December 31, , ,718 Total (gains) losses Initial fair value of debt derivative at note issuance 525,330 Mark-to-market at June 30, 2016: (12,017) (131,378) Transfers out of Level 3 upon conversion or payoff of notes payable (323,898) Balance, June 30, 2016 $ 192 $ 481,772 Net gain for the period included in earnings relating to the liabilities held at June 30, 2016 $ 12,017 $ 131,378 Fluctuations in the Company s stock price are a primary driver for the changes in the derivative valuations during each reporting period. The Company s stock price decreased approximately 98% from December 31, 2015 to June 30, As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company s derivative instruments. The estimated fair value of these liabilities is sensitive to changes in the Company s expected volatility. Increases in expected volatility would generally result in a higher fair value measurement. NOTE 13 SUBSEQUENT EVENTS Subsequent common stock issuances In July 2016, the Company issued an aggregate of 4,937,430 shares of its common stock in settlement of $36,480 notes payable and $772 of accrued interest; and 651,695 shares for services. 24

25 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to we, us, and our are to the Company, unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited condensed interim financial statements and the accompanying related notes included in this quarterly report and our audited financial statements and related notes and Management s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission. Cautionary Statement Regarding Forward-Looking Statements This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on our management s beliefs and assumptions and on information currently available to our management. Any such forward-looking statements would be contained principally in Management s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of regulation. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as anticipates, believes, could, estimates, expects, hopes, intends, may, plans, potential, predicts, projects, should, will, would or similar expressions. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in greater detail in Risk Factors. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management s beliefs and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits to the report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended December 31, Unless otherwise indicated or the context otherwise requires, all references in this Form 10-Q to we, us, our, our company, U. S. Stem Cell, Inc. or the Company refer to U.S. Stem Cell, Inc. and its subsidiaries. Our Ability to Continue as a Going Concern Our independent registered public accounting firm has issued its report dated March 8, 2016, in connection with the audit of our annual financial statements as of December 31, 2015, that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern and Note 2 to the unaudited financial statements for the period ended June 30, 2016 also describes the existence of conditions that raise substantial doubt about our ability to continue as a going concern. Overview We are an emerging enterprise in the regenerative medicine/cellular therapy industry. We are focused on the discovery, development and commercialization of cell based therapeutics that prevent, treat or cure disease by repairing and replacing damaged or aged tissue, cells and organs and restoring their normal function. Our business includes the development of proprietary cell therapy products as well as revenue generating physician and patient based regenerative medicine / cell therapy training services, cell collection and cell storage services, the sale of cell collection and treatment kits for humans and animals, and the operation of a cell therapy clinic. 25

26 US Stem Cell Training, ( SCT ), an operating division of our company, is a content developer of regenerative medicine/cell therapy informational and training materials for physicians and patients. SCT also provides in-person and online training courses which are delivered through in-person presentations at SCT s state of the art facilities and globally at university, hospital and physician s office locations as well as through online webinars. Additionally, SCT provides hands-on clinical application training for physicians and health care professionals interested in providing regenerative medicine / cell therapy procedures. Vetbiologics, ( VBI ), an operating division of our company, is a veterinary regenerative medicine company committed to providing veterinarians with the ability to deliver the highest quality regenerative medicine therapies to dogs, cats and horses. VBI provides veterinarians with extensive regenerative medicine capabilities including the ability to isolate regenerative stem cells from a patient s own adipose (fat) tissue directly on-site within their own clinic or stall-side. US Stem Cell Clinic, LLC, ( SCC ), a partially owned investment of our company, is a physician run regenerative medicine/cell therapy clinic providing cellular treatments for patients afflicted with neurological, autoimmune, orthopedic and degenerative diseases. SCC is operating in compliance with the FDA 1271s which allow for same day medical procedures to be considered the practice of medicine. We isolate stem cells from bone marrow and adipose tissue and also utilize platelet rich plasma. U.S. Stem Cell, Inc. s comprehensive map of products and services: All living complex organisms start as a single cell that replicates, differentiates (matures) and perpetuates in an adult organism through its lifetime. Cellular therapy is the process that uses cells to prevent, treat or cure disease, or regenerate damaged or aged tissue. To date, the most common type of cell therapy has been the replacement of mature, functioning cells such as through blood and platelet transfusions. Since the 1970s, first bone marrow and then blood and umbilical cordderived stem cells have been used to restore bone marrow, as well as blood and immune system cells damaged by the chemotherapy and radiation that are used to treat many cancers. These types of cell therapies are standard of practice world-wide and are typically reimbursed by insurance. Within the field of cell therapy, research and development using stem cells to treat a host of diseases and conditions has greatly expanded. Stem cells (in either embryonic or adult forms) are primitive and undifferentiated cells that have the unique ability to transform into or otherwise affect many different cells, such as white blood cells, nerve cells or heart muscle cells. Our cell therapy development efforts are focused on the use of adult stem cells; those cells which are found in the muscle, fat tissue and peripheral blood. There are two general classes of cell therapies: Patient Specific Cell Therapies ("PSCTs") and Off-the-Shelf Cell Therapies ("OSCTs"). In PSCTs, cells collected from a person ( donor ) are transplanted, with or without modification, to a patient ( recipient ). In cases where the donor and the recipient are the same individual, these procedures are referred to as autologous. In cases in which the donor and the recipient are not the same individual, these procedures are referred to as allogeneic. Autologous cells offer a low likelihood of rejection by the patient and we believe the long-term benefits of these PSCTs can best be achieved with an autologous product. In the case of OSCT, donor cells are expanded many fold in tissue culture, and large banks of cells are frozen in individual aliquots that may result in treatments for as many as 10,000 people from a single donor tissue. By definition, OSCTs are always allogeneic in nature. Various adult stem cell therapies are in clinical development for an array of human diseases, including autoimmune, oncologic, neurologic and orthopedic, among other indications. While no assurances can be given regarding future medical developments, we believe that the field of cell therapy holds the promise to better the human experience and minimize or ameliorate the pain and suffering from many common diseases and/or from the process of aging. 26